ETF Edge - Wall Street's Wall of Worry

Episode Date: February 14, 2022

CNBC's Frank Holland spoke with Tom Lydon, CEO of ETF Trends, John Davi, Founder and CIO of Astoria Portfolio Advisors and Wendy Wong, Head of Sustainable Investment Partnerships at New York Life Investments. As investors brace for hotter inflation and fast and furious rate hikes from the Federal Reserve, the team discusses how to cope with added geopolitical tensions on top of all that. Plus, as the reopening story ramps up, will cyclicals finally have their time in the sun? And highlighting a new flavor of ESG investing – “healthy heart” investing – on this Valentine’s Day. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're going to bring you compelling interviews, thoughtful market analysis and breaking down what it all means for investors. I'm Frank Holland, filling in for Bob Bassani today.

On the show, as investors brace for hotter inflation and fast and furious rate hikes from the Fed, We'll discuss how to cope with added geopolitical tensions on top of all of that. And as the reopening story ramps up, well, cyclicals finally have their time in the sun, plus will highlight a new flavor of ESG investing, healthy heart investing on this Valentine's Day. Here's my conversation with Tom Leiden, CEO of ETF Trends, John Davy, founder and CIO of Astoria Portfolio and Wendy Wong, head of Sustainable Investment Partnerships at New York Life Investments. Tom, we're going to kick it off with you. ETFs are still on pace to hit over $700 billion in 2022.

Pretty tough to top that record year that we had just in 2021. But why do inflows into equity funds? Why do they still continue unabated despite all the uncertainty out there? Well, you're right, Frank. It would be tough to beat that trillion dollar mark that we almost hit last year, but we're on pace for almost $500 billion a month. A couple changes, though. Inflation and the threat of rising interest rates have really scared off investors.

when you look at the average financial advisor and we're surveying them every week, they've had major construction changes in their portfolios. What they're doing is pairing back the traditional 60-40 and moving more out of fixed income and in areas like alternative income strategies, like dividends or even options overlay strategies. And then most importantly, more and more advisors

are allocating, as you say, to commodities. We're seeing commodities shoot up all over the place And there's some great diversified commodity options that are there. Look, rising rates can be very, very detrimental to client portfolios. Advisors understand that. Investors haven't seen that in a long period of time, but they're voting with their feet. Absolutely. John, over to you.

How would you say that investors, how should they cope with all this elevated risk? Well, I think, you know, largely speaking, commodities make a lot of sense because they are hedge against inflation. didn't have much inflation for the last 10 years. You know, CPI is now a 40-year highs. So tickers like PDBC, BCI, these are broad-based commodity ETFs that we utilize at a story advisors. There's really three reasons why you want to own commodities. One, it's a hedge against inflation.

So these tickers that I just mentioned, you know, they're up 11% year-to-date. S&P's down 7%, bonds are down 3. So you see that right then and there that they're serving their place in the portfolio to provide inflation protection. but there's two other attributes. One is, you know, when you have geopolitical risk and tension, you tend to see oil go up, you tend to see gold go up, and that's different from stocks, right?

When stocks go down, and this year, actually, bonds have been going down. So the technical term is that they provide positive skewness, you know, stocks have, you know, negative skewness. So it's worth having in a portfolio just to diversify your risk attributes. And then the third reason, which is more unique, is that they actually provide right now a positive, benefit. There's no cost to own in these commodities. And this has to do about how commodity futures roll. Right now you get into benefit. Years in the past, they used to have a cost. So those three

attributes, you know, we like to have commodities in our portfolios at a story advisors. All right, digging a little bit deeper into the reflation trade. Reopening ETFs, they're red-hot again, powered by renewed flows into travel and leisure ETFs. This month, as COVID restrictions ease all across the globe, that reopening narrative is beginning to really regain some steam. Airline ATFs, hotel ETFs, and leisure and ESCO Dynamic Leisure and Entertainment ETF, ticker, PEJ. They've all led the charge higher up 5 to 10% just over the past week. And as rates rise,

investors are offloading broad swaths of bond ETFs here in the U.S., but the global fixed income is getting just a bit more of a bid. Tom, back over to you again. What are the flows telling us about how investors are really feeling right now? Is it finally the cyclicals, time to shine? Yeah, you're right. right on the reflation trade as things start to warm up, people are mandated less to wear masks.

That's really good. It's very optimistic. But at the same time, what we're seeing is diversification. It's nice to pick up some of these thematic strategies, like I say, P-E-J or the airlines' ETF, JETs. But I think the key thing here is it's diversification. As you point out with fixed income, We're seeing rising interest rates and the threat of rising interest rates here in the U.S., Frank, but overseas, not all developed countries are suffering from that threat of rising rates. So people are diversifying to areas like emerging markets where it's not only an opportunity to get a better yield, and you're also not going to be threatened by central banks necessarily being as hawkish as we are here in the U.S. Also, there's a currency play here.

If we're in a situation where some of these foreign currencies may actually do better than the U.S. dollar, there's another form of diversification. Yeah, certainly. John, over to you. You run the Astoria Inflation Sensitive ETF. The ticker is PPI. That's up nearly 6 percent year to date. Tell us what you're seeing here.

So about two years ago, I actually came on the ETF Edge in June of 2020. And at that point time, the 10 years at 30 basis points, there was a ton of liquidity being provided to the market. I know from the data and the evidence and history of managing money that, you know, typically after a recession, you get this, you know, wave higher in value, cyclicals, inflation-sensitive stock. So, you know, about a year and a half ago, we put together a formal inflation-sensitive model portfolio. It's basically 10 instruments to kind of try and hedge against inflation, you know, banks, energies, industrials. a couple months ago, we went ahead and launched a formal ETF. So Ticker PPI, which is a plane of producer price next, it gives you exposure to banks, energy, industrial materials, those four sectors.

The data shows that historically those four sectors do the best when you have rise in inflation. We do also add commodities in there. We like commodities, you know, as we just talked about and all the attributes that they provide. You know, what I would say is that, you know, Tom mentioned he surveys advisors. We serve as an outsource CIO for other financial advisors. We actually have the evidence. We see these portfolios. You know, on the margin, yes, are they tilting more towards, you know, commodities and things like tips?

Yes, but the lion's share of the money is still in very deflationary sectors and, you know, still a lot of growth bias, a lot of technology bias. So, you know, we kind of have been saying, you know, adds, you know, 5, 10 percent of your portfolio towards inflationary type ETFs. You know, obviously we like our ticker, but there's other instruments out there. You know, what I would say is that, you know, from 1989 to 2000, you had this big bull market and growth stocks. And then after the, you know, the dot-com bubble, you had a seven-year run where value stocks outperformed.

Then from the great financial crisis till about 2020, you had, you know, a massive run in growth stocks. I think this value cyclical inflation trade is still in the early stages. You know, if I'm a financial advisor, I would really be looking at your portfolio and say, you know, what can you do on the margin to hedge against inflation? CPI is, you know, 7%. When I look around the world, I see inflation more like 15%, even higher when I look at costs of goods and, you know, grocery shop and home prices.

So I would really start to, like, be more active in your portfolio. Yeah. And Frank, one thing just to add on really quick, a lot of folks feel that a way to protect yourself is via gold. Gold traditionally has been a great protector against inflation, but it's been one of the worst performing commodities during this inflationary period. So as John's pointing out, it's important to be diversified among a whole basket of different commodities, and they've done that in their ETF, PPI. Yeah, really interesting stuff, guys. They're obviously inflation having a big impact on the markets and your investment strategy overall. So finally, we're talking healthy heart investing today in light of both Valentine's Day,

of course, an American Heart Month, raising awareness for the importance of cardiovascular health. The IQ Healthy Hearts ETF, powered by Index IQ, sees a portion of fees go towards supporting the American Heart Association's crucial fight against heart disease. Wendy Wong joins us now to tell us much more. She's the head of Sustainable Investment Partnerships at New York Life Investments. Hey there, Wendy. Hello. So Wendy, the heart ETF relies on a thematic ESG approach that really focuses on companies that help prevent heart disease and provide cutting edge treatment for those diseases. Can you tell us a little bit more about this ETF? Yeah, sure. Thank you. The IQ Healthy Hearts ETS ETF is designed to help investors do well while doing good. And let me explain that a little bit more. On doing well for investors, Heart is made up of companies that are treating and preventing heart disease. And then for the doing good, New York Life investments,

you mentioned, makes an ongoing contribution from a portion of hearts management fees to the American Heart Association. American Heart Association uses this to support its Social Impact Fund, which addresses health inequalities and under-resourced communities. And we see it's making an impact. Our support of the Social Impact Fund has accelerated its growth by nearly three times, allowing social impact fund to increase its support from 33 investees in only five cities to 88 investees in 15. Very interesting. Very interesting. Tom, over to you. How do you see an ETF like this playing out in the ESG space? You couldn't find a better example, Frank. I mean, there's not a family in the U.S. that has not been negatively affected by heart disease.

And rather than just writing a check to the American Heart Association, you can actually help your family invest and actually keep in touch with what's going on. with all the good work that's being done in this space, and by doing that, you can appreciate your portfolio, and also a portion of that goes to the American Heart Association. Part of the revenues and this tens of millions of dollars every year that are donated from New York Life over to the American Heart Association. What a better example to make sure that we're not only doing right,

but feeling good about it at the same time, and maybe learning how we can help our family do a better job of staying healthy. Yeah, heart-healthy investing, a new wrinkle on ESG investing. Thank you for tuning in to this week's ETF Edge podcast. Don't forget, you can find all of our content online at etFedge.c.com or tweet us your questions anytime at ETF Edge, CNBC. InvescoQQQQ believes new innovations create new opportunities. Become an agent of innovation.

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